Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Kratos Defense & Security Solutions (NASDAQ:KTOS), we don’t think it’s current trends fit the mold of a multi-bagger.
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Kratos Defense & Security Solutions, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.023 = US$38m ÷ (US$1.9b – US$261m) (Based on the trailing twelve months to September 2024).
Therefore, Kratos Defense & Security Solutions has an ROCE of 2.3%. Ultimately, that’s a low return and it under-performs the Aerospace & Defense industry average of 9.6%.
View our latest analysis for Kratos Defense & Security Solutions
Above you can see how the current ROCE for Kratos Defense & Security Solutions compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Kratos Defense & Security Solutions for free.
The trend of ROCE doesn’t look fantastic because it’s fallen from 4.2% five years ago, while the business’s capital employed increased by 66%. That being said, Kratos Defense & Security Solutions raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Kratos Defense & Security Solutions probably hasn’t received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
In summary, despite lower returns in the short term, we’re encouraged to see that Kratos Defense & Security Solutions is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 47% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
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